Balance Saving & Investing

The chaotic events of the last six months of 2008 would make even the most daring bull investor cower under his desk in fear. Crude oil rose to nearly $150 a barrel and then plunged 67% to its year-end level in the mid-$40s. AIG and Citi were bailed out by U.S. taxpayers but Lehman Brothers got left high and dry, and its failure contributed to the ice-cold credit market. The future of the American automotive industry is hanging in the balance. Hedge funds are unwinding leveraged positions like it's going out of style, burning everything from “buy and hold” DOW components to BRIC growth companies in their path.

Right now, the only thing we can be sure of is uncertainty and sky-high volatility in the stock market. If you’re paying attention to your portfolio, as you should be in bad times and in good, you have probably noticed that your asset allocations have changed. Depending on your age, job security and family situation, you may need to cash out of some of your positions to healthily balance saving and investing. Even if you have managed to keep your money relatively stable, though, the current economic climate makes the topic of how to balance saving and investing worth revisiting.

Prioritize short-term needs

Food, clothing, Wii, and shelter — can you pick out which one of these is not a basic human necessity? Take the time to make a list of your short- and long-term needs and prioritize them. You may be shocked at what these findings reveal about the importance placed on the luxuries in life. If you need to find ways to save more money, start by trimming the number of nights a week you go out for dinner or drinks. Steer clear of consumer electronics and brand-name clothing unless you truly can’t live without the latest Abercrombie & Fitch sweater-vest. Also, consider delaying any long-term savings plans you are currently enacting; it may be better to focus on wrapping up the emergency fund rather than chipping away at a college account for an unborn child. Cut through the gray area between “wants” and “needs” to figure out the true amount you will need to survive possible unemployment or a steep recession.

Don’t flee from the market

It would have been perfect to exit the market a year ago when it was riding high (remember those glorious days?). If you are currently invested and have painfully endured the recent slow-motion crash, however, now is not the time to panic and pull out of the market. At this point, the S&P has dropped over 40% so far this year, and, although we could see further declines, it is a little too late to jump ship. That being said, an intelligent investor continually evaluates the companies he owns and makes informed decisions. Although the major indexes may not share the same fate as the Titanic, that doesn’t mean your favorite individual stocks are in the clear. Put in the research, talk with your financial advisor and make an educated decision. Keep your eye on the ticker and watch for market rallies as an opportunity to sell some of your assets if you need the money in the short term.